Dollar turns up after Italy, Spain downgrades

Strong U.S. payrolls buoyed stocks earlier to greenback’s detriment

By

DeborahLevine

PolyaLesova

NEW YORK (MarketWatch) — The dollar turned up against the euro on Friday after Fitch Ratings downgraded Italy and Spain, reminding investors of persistent sovereign debt problems and doubts about whether some euro-zone members will be able to meet their budget goals.

The greenback was under pressure in U.S. morning trading after an upbeat nonfarm-payrolls report for September belied fears of a sluggish rate of growth in employment and encouraged investors to move back into riskier assets.

The dollar index
DXY, +0.35%
which tracks the performance of the greenback against a basket of major currencies, rose to 78.660, from 78.611 late Thursday.

U.S. manufacturing starts to return

(4:54)

Some surprising U.S. industry sectors may benefit as economic forces prompt more manufacturers aiming products at Americans to consider building capacity in the U.S. rather than China.

The euro
EURUSD, -0.4615%
turned down to $1.3401, after topping $1.35 and versus $1.3434 in North American trading late Thursday.

Fitch cut Italy’s credit score to A+ from AA-, reflecting “the intensification of the euro zone crisis“ that will require a “politically and technically complex” solution. Read about Italy’s downgrade.

“The early rally in favor of the euro following better-than-expected labor market data from the United States was cut short,” said Christopher Vecchio, a currency analyst at DailyFX. “The rally may be over now that markets are made fully aware of the impending crisis once more.”

The move erased the euro’s gain for the week, which had come amid more steps taken by the European Central Bank and hopes of more willingness among government officials to support struggling banks. It also erased the single currency’s gain for the year, after it had risen as much as 10% in April.

Analysts also noted expectations have risen for something to come out of a meeting this weekend between German Chancellor Angela Merkel and French President Nicolas Sarkozy

“We believe that the notion of a bank recapitalization program is now in the market, but that the details of how coordinated it will be, how broadly it will be applied and where injections will come in the capital structure are required for a significant new leg of risky asset outperformance,” said strategists at Credit Suisse. “Clues may come from this weekend’s Merkel-Sarkozy meeting, but it seems more likely that they will be ten days away. Absent those details, we think that the money markets will remain broken and the risk recovery therefore vulnerable.”

U.S. payrolls

The dollar dropped in morning action after the Labor Department said U.S. employment grew by 103,000 workers in September, trumping expectations for an increase of about 59,000 jobs in a MarketWatch survey. The unemployment rate held remain steady at 9.1%.

Expectations had been muted after an initial reading for August showed the U.S. failed to add any jobs during that month. August and July employment figures were revised higher as well. Read story on the employment report.

For the week, the dollar index is us 0.2%, thought it’s still down 0.4% this year.

In other foreign-exchange trading, the pound
GBPUSD, +0.0159%
rose to $1.5563 from $1.5438 late Thursday. The pound had fallen sharply in the previous session after the Bank of England announced a new round of quantitative easing aimed to boosting the sluggish U.K. recovery.

Against the Japanese yen, the dollar
USDJPY, +0.74%
traded at 76.90 Japanese yen, compared with ¥76.63 Thursday. The Japanese unit is also perceived to be a safe haven and tends to weaken when investors’ appetite for risk improves.

During the Asian session, the yen showed little reaction to the Bank of Japan’s decision to keep monetary policy on hold. Read more about the decision.

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